Adam Smith, Allyn Young, and the division of labor.

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Adam Smith, Allyn Young, and the division of labor.

The division of labor is central to Adam Smith's explanation of growth. (1) For Smith the division of labor is the chief source of productivity gains, in his famous pin factory example, (2) if each man specializes in some particular aspect of pin making, it renders possible a dramatic increase in total output and output per man. On the other hand, if there is no specialization so that every man is involved in all the aspects of pin making, output and productivity are minimal. Smith in his Wealth of Nations listed three advantages flowing out of the division of labor: increase in skills and dexterity of each worker, saving of time while going from one kind of work (or process) to another, and, finally, invention of machinery which facilitates and abridges labor. (3)

The division of labor itself arises because of the propensity of human beings to truck, barter, and exchange. This tendency is found only in humans, not in animals. Secondly, the full potential of the division of labor can only be exploited in an exchange economy. In a society of hunters, or in a subsistence economy, or in a rude state of society some kind of exchange is possible but since the total produce exchanged is quite limited, the possibility of the division of labor also becomes limited. Therefore, since the division of labor arises as a result of exchange, it essentially becomes limited by that power which gives rise to it. In other words, the division of labor is limited by the size of the market.

Not only Smith's theory of growth but also his theory of international trade was based on the concept of the division of labor. International trade widens the market and gives vent to the resources which, in the absence of trade, would remain unemployed or underemployed. International trade, by overcoming the narrowness of the domestic market, ensures that the division of labor is carried to the highest perfection. This in turn increases the productive powers of a nation and augments its annual produce to the utmost. A country produces products for which it is best suited (i.e., for which its absolute costs are lower) in terms of natural or acquired advantages and exchanges its surplus produce with the produce of other countries for which there is a demand in the home market. Free trade not only ensures gains to the consumers who get a product at a lower price but it also ensures more productive deployment of domestic capital. Indeed, Smith argued that the total industry of a country cannot be out of proportion with its total capital. So any artificial direction to economic activity, say by tariffs or import restrictions, misdirects a country's capital from more productive employments to less. (4) This indeed is why Smith was against the mercantilist policies of governmental interference and the associated parasitic apparatus they spawned. For Smith, therefore, the theory of growth and the theory of international trade were two sides of the same coin. As H...

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